rio comments, page-12

Hi guys,

Yup I've read the post on the communication with BRM's geo. I believe that they do believe that a saleable product will be the result of further bulk testwork. However my only concern is that the testwork done thus far hasn't 100% confirmed it. The analogy of blue and red marbles is a good one but what if there are blue, red and purple marbles in the mix. The final key to this equation is if they find a process that can turn that purple marble into a nice high Fe, low contaminant marble. Trust me guys, if they had managed to do this successfully, this would be clearly spelt out in their announcement. This leads me to believe that they have not succeeded thus far but have a fair expectation of success in the future. The risk is that management are typically bullish on their own prospects and one MUST not discount the risk of failure, especially when you look around the projects in the Pilbara and there are no 40% grade hematite RESERVES around.

The issue around grades and rail/port is one of economics. For bulk minerals where transport costs become a very important part of the equation, in an infrastructure constrained environment the companies who control the infrastructure will logically act in the following ways:

1) If you can only ship XX MT of ore a year regardless of grade, shipping the best ore means your cost per tonne as a percentage of revenue is decreased.

2) If you have as much lower grade ore as you need for the foreseeable future (say, a couple of billion tonnes of reserves @ 57%) then in order to achieve point 1, you obtain high grade from ppl who need to use your infrastructure. You may also choose to blend this higher grade ore in order to obtain a better price on your lower grade ore.

3) Following on from points 1 and 2, there is no incentive to let someone else ship lower grade ore and pay you a margin of $10 hypothetically. Why do that when you can dig out and ship your own ore cheaper and make more than $10 on it? If you have to let third party ore onto your rail line, all things being equal you are bound to choose high grade high quality ore because you can demand a higher margin AND use it to blend.

I could be completely wrong on this but recent iron ore strategies announced by the big three have implied this to me. FMG with their ann. on blending and Rio and BHP with their flagging conservation of their higher grade deposits and increasing their blending of high grade with lower grade CID. This is all pointing towards a shortage of high grade in a capacity constrained environment.

The current advantage of magnetite over low grade hematite is that you can ship a far lesser number of tonnes of high grade magnetite concentrate over capacity constrained infrastructure in order to blend, because magnetite conc. is typically in the high 60's. Differences in cost are negated by the fact that infrastructure providers can reap the benefit of higher grade conc in addition to the $10/tonne.

I think the MD of the company so often referenced in these iron ore junior threads is a good analogy for the current situation with BRM. Cast your mind back to the days when Andrew Forrest was assuring everyone that the new technology being pioneered in immediate large scale by Anaconda was sure to work. This was followed by many unanticipated issues as is often the case with unproven methodologies.

He did the same thing with Fortescue, using Wirtgen surface miners on CID ore that most at the time regarded as barely DSO. This time he succeeded.

Brockman could go the way of Anaconda or FMG and this is the risk one takes with any unproven ventures in terms of the benficiation process. However unless they really come up with the goods in terms of contaminants, the infrastructure is a huge impediment in my layman's opinion. I just can't see why someone would want to rail lower grade ore when FMG just have so much of it already.

A Chinese party coming in and building a dedicated rail and port is a possibility, though again they may shy away due to the unproven nature of the deposit.

On the upside is the scale of the resource, the free digging nature of the detrital ore and relatively experienced management for a junior.

High risk, high reward. People with different risk appetites will jump in at different times, or not. I will be watching for them to hit various targets for sure, and I'm sure we will all learn alot from this company if nothing else.

Speaking to the company is a great start. I'd be asking them what the Si and Al levels were with the testwork they did initially and also what sort of beneficiation process exactly they are planning to try.

I suspect at these volumes none of us on Hotcopper are going to influence the future of this company much so go with the flow and don't be concerned with up or down ramping! ;)

Cheers
UIO